Custodial accounts

Custodial accounts provide a simple way to gift money to a minor child. They enable the donor to retain control of the account until the beneficiary reaches the age of majority (typically 18 or 21, depending on the state). Depending on the state, custodial accounts include structures such as UTMA (“uniform trust for a minor”) and UGMA (“uniform gift for a minor”) accounts, and they can easily be set up at a bank, broker/dealer or trust company.

Unlike 529 plans, the funds in the UGMA or UTMA account do not have to be used for higher education expenses. UGMA and UTMA accounts do not have any tax advantages as 529 plans do, although contributions can be designed to qualify for gift tax exemptions. The minor child beneficiary of the custodial account will be responsible for paying income taxes on the earnings generated by the custodial account. Keep in mind that income earned by the minor, including in any custodial accounts, will be subjected to the “kiddie tax” and will be taxed at the parents’ tax bracket if it exceeds certain thresholds.

The advantage of custodial accounts is that they are relatively easy and inexpensive to set up. The disadvantage is that there is very little customization available. For example, with both the UGMA and UTMA custodial accounts the beneficiary will have full access to the accounts when reaching the age of majority, and there is no way to prevent or change this. This is in contrast to a trust, which while generally more expensive and cumbersome to set up, can be customized to suit your individual needs.